Trinseo PLC
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Trinseo Fourth Quarter 2020 Financial Results Conference Call. We welcome the Trinseo market management team, Frank Bozich, President and CEO; David Stasse, Executive Vice President and CFO; and Andy Myers, Director of Investor Relations. Today's conference call will include brief remarks by the management team followed by a question-and-answer session. The company distributed its press release along with its presentation slides at close of market yesterday. These documents are posted on the company's Investor Relations website and furnished on the Form 8-K filed with Securities and Exchange Commission. .

[Andrew Myers:]

Thank you, Christel, and good morning, everyone. . Our disclosure rules and cautionary note on forward-looking statements are noted on Slide 2. During this presentation, we may make certain forward-looking statements, including issuing guidance and describing our future expectations. We must caution you that actual results could differ materially from what is discussed, described or implied in these statements. Factors that could cause actual results to differ include, but are not limited to, risk factors set forth in Item 1A of our annual report on Form 10-K or in our other filings made with the Securities and Exchange Commission. The company undertakes no obligation to update or revise its forward-looking statements. Today's presentation includes certain non-GAAP measurements. A reconciliation of these measurements to corresponding GAAP measures is provided in our earnings release and in the appendix of our investor presentation. A replay of the conference call and transcript will be archived on the company's Investor Relations website shortly following the conference call. The replay will be available until February 4, 2022. Now I'd like to turn the call over to Frank Bozich.

[Frank Bozich:]

Thanks, Andy, and welcome to Trinseo's fourth quarter earnings call. First and foremost, I'd like to start by thanking our employees for all of their continued hard work, especially given the unprecedented economic and social issues during 2020, which made for the most challenging environment I've experienced in my 35 years in the industry. I was very impressed with how agile our team was and how they adapted to rapidly changing working conditions. We were never overwhelmed by the crisis as everyone remained very collaborative, focused and engaged throughout the year. I have no doubt that their passion enabled us to successfully weather the storm and emerge in an even stronger financial position compared to the beginning of 2020. I'm very proud of what we accomplished, and I'm looking forward to a very bright future for Trinseo. Moving to our financial performance. I'm overall very pleased with our 2020 results. As we noted in our December issued guidance, we continued to see improved demand and profitability across the company in the fourth quarter, with strong pretax income and adjusted EBITDA at its highest level in more than 3 years. Excluding feedstocks, our total sales volume in the fourth quarter was 6% higher than prior year as we observed strength in demand in many of our end markets, including appliances, tires and especially automotive, where fourth quarter volume was 7% higher than the prior year after declines of 65% in the second quarter and 13% in the third quarter.

[Operator:]

. Your first question comes from the line of Frank Mitsch with Fermium Research.

[Frank Mitsch:]

Frank, wanted to -- nice end to the year, but listen, I wanted to talk about '21, your guidance of $400 million to $450 million of EBITDA on the basis of as the company exists today actually looks like a nice increase relative to where the Street is, given there's some confusion as to who has PMMA and who doesn't, et cetera. But it does look like a material increase year-over-year. Where do you see -- segment-wise, where do you see the most upside among your various segments as we think about '21 versus '20?

[Frank Bozich:]

So year-over-year, we would see that in our Base Plastics. And we're seeing really excellent traction with that group in how their value-based pricing. And then there's a second component that currently, there's some supply chain tightness that we're benefiting from that when we look at that range, we don't anticipate will continue for the full year, it will normalize after the outage season in Q1. But we're benefiting from those comm ex initiatives. Obviously, rubber returning to normal will be a big improvement year-over-year as we get back to pre-COVID level demands. So those two segments are really where we see the biggest year-over-year improvement.

[Frank Mitsch:]

Got you. And that's -- obviously, the second quarter was very negatively impacted in Synthetic Rubber. And speaking of that business, it seems like the environment for M&A is picking up here. Can you discuss what your thoughts are in terms of the ability to monetize that business? How are you feeling today relative to where you felt a few months ago when you first announced that initiative?

[Frank Bozich:]

Yes. So we've seen significant interest in the business, and we're really confident that we'll conclude our process to evaluate our options by the middle of the year.

[Operator:]

Your next question comes from the line of David Begleiter with Deutsche Bank.

[Katherine Griffin:]

This is Katherine Griffin on for David. So just first question on guidance. So it seems like excluding the timing impact, EBITDA should be up in Q1 versus Q4. So then if we kind of assume that Q1 is up from, let's say, $120 million ex timing, then relative to the full year 2021 guidance, is the right EBITDA cadence for Q2 through Q4 somewhere like in the $100 million range? Am I thinking about that right?

[Frank Bozich:]

[Katherine Griffin:]

Great. And then just thinking about kind of the cadence of temporary cost savings coming back next year, could you just talk about kind of how you expect those to flow through just as inventories and demand kind of gets better?

[Frank Bozich:]

I think if I understand the question, I think I'm going to answer or address the question of when we think we'll relax the short-term cost savings measures that we've continued to keep in place. And if that's what you're asking?

[Katherine Griffin:]

Yes. No, that's perfect. Okay.

[Frank Bozich:]

Okay. So we had -- in total, last year, we had $30 million contribution from a combination of both structural and short-term cost savings initiatives. We will keep those short-term cost savings initiatives in place until we get more certainty that the recovery is here to stay and the market outlook progresses. So again, I don't have an exact timetable for when we would relax that. And but...

[David Stasse:]

Yes, Katherine, this is Dave. Maybe I'll add a couple of things. I mean, look, the elements of -- the really, as Frank said, we took $30 million of cost actions in '20, about half of that was structural and half of that was, what I would call, temporary. The full year impact of the half that was structural will be $25 million, so a $25 million structural cost savings out of the company in '21. The part that it's temporary, I mean, a big part of that is T&E, for example, travel and entertainment. I mean nobody is traveling in the company right now. So what we've budgeted -- and this is all baked into our guidance. What we've kind of assumed is those elements, trade shows, T&E, I mean, things like that will return to kind of pre-COVID levels in the second half of the year. We'll have to see if that plays out or not. But that kind of gives you the perspective, I think, of how we think about that.

[Operator:]

Your next question comes from the line of Hassan Ahmed with Alembic Global.

[Hassan Ahmed:]

I was taking a look at your volumes, obviously, sequentially, really good performance in Engineered Materials and Synthetic Rubber. And obviously, I understand certain end markets, autos in particular, picking up quite nicely. As you guys sort of came up with your guidance, could you talk a bit about the sustainability of some of these volume levels that you're seeing, particularly in these two segments?

[Frank Bozich:]

So I would say that we feel very confident in both Engineered Materials and Synthetic Rubber volumes continuing at the current levels, assuming the recovery sustains itself. So there's a couple of things that are driving that beyond just market recovery. And a lot of it is based on the new products that we're introducing. And as we mentioned in the commentary, in Engineered Materials, we're really getting good traction with our post-consumer waste-containing or recycled-containing materials that go into consumer electronics. We're also getting good traction on bio-based materials that go into footwear. So irrespective of market dynamics, we're winning new business with those innovations, and we're winning those at better margins than non-recycled or sustainable materials. In Synthetic Rubber, you have a similar dynamic playing itself out where it's an innovation-driven business in performance tires, and we've been in -- we've introduced new grades that are being specified. And those platform wins are going to result in growth going forward. So again, we think that the volumes that we're enjoying today are sort of pre-COVID level volumes, but the mix has improved because of those commercial activities we've taken.

[Hassan Ahmed:]

Understood. Understood. Very helpful. And again, on the 2021 guidance, a lot of your sort of raw material supply contracts were expiring last year. So obviously, this would be the first year, 2021, when be it benzene and ethylene, BD, styrene, BPA, a variety of these sort of raw materials will sort of be under the umbrella of new contracts. So could you talk a bit about how we should think about the puts and takes of the 2021 guidance in light of some of these new raw material contracts you guys may have structured?

[Frank Bozich:]

Yes. What I would say is that we have more market-based contracts in -- across the board. And in particular, in polystyrene in styrene monomer for benzene and ethylene, we had new contracts that we're operating under. But again, we believe that those reflect the current market conditions. And there are some benefits that we're seeing from that, that are passing through into our 2021 outlook, but it's not significant. Really, the big driver for 2021 improvement are the market conditions in the commercial actions that we're taking.

[Hassan Ahmed:]

Got it. So overall, kind of net neutral in terms of year-over-year?

[Frank Bozich:]

I would say, overall, slightly positive.

[Hassan Ahmed:]

Slightly positive. Perfect.

[Operator:]

Your next question comes from the line of Matthew Blair with TPH Co.

[Matthew Blair:]

I was hoping you could just elaborate a little bit more on your expectations for polystyrene in 2021. And just in particular, how sustainable are the strong 2020 results?

[Frank Bozich:]

So at this point, we believe they're pretty -- the benefits we're seeing in 2020 are pretty sticky. A lot of that is driven by commercial actions and demand for packaged foods and increased demand for appliances and from changing conditions that were driven by COVID. So again, we're pretty confident that what we've been doing in polystyrene are -- we'll see that benefit throughout 2021. And the other thing I want to point out is, we're also seeing a significant benefit from the introduction of the circular polystyrene products that we've introduced. And so as we accelerate and shift our mix to more sustainable products, we're going to -- actually, I would expect that we would see a further improvement in our margins and our growth simply because those products are in very high demand. And most of our end consumers and the end consumer products companies really want to introduce products that are more sustainable, and we're a leader now in that. So as we continue to make progress, I would expect not only sustainability for our performance but improvement.

[David Stasse:]

Matthew, this is Dave. I'd like to add one thing -- about 1/4 of our polystyrene revenue is high-impact polystyrene -- excuse me, of our polystyrene volume is high-impact polystyrene that's sold to appliance manufacturers in Asia. And that's clearly -- it's a good market, and we've got a differentiated product there. And that's one of the areas where we've really capitalized on what Frank mentioned earlier on the value-based pricing. So I just wanted you to keep in mind, 1/4 of our polystyrene business is -- it is differentiated product. And just to kind of buttress what Frank said about the stickiness or sustainability of that, I mean, I just wanted to keep that part in mind that we do have a differentiated element of the portfolio there.

[Matthew Blair:]

Sounds good. And then how would you characterize the spring 2021 turnaround season for styrene? Is it likely to be above average?

[Frank Bozich:]

No, we think it will be normal.

[Operator:]

Your next question comes from the line of Laurence Alexander with Jefferies & Company.

[Laurence Alexander:]

Two questions. First of all, on the value-based pricing initiatives, where do you think Trinseo is in terms of capturing the potential of that and how far do you have room to go in terms of structural improvement in your margins? And then secondly, as you think about the characterization of where Trinseo wants to be as a more solutions-focused specialty chemical company, can you characterize what skill sets you have internally that really drive that? And how much needs to be brought in through hiring -- shift in hiring practices or M&A, just in terms of acquiring skill sets and technology platforms?

[Frank Bozich:]

So yes, I'm going to start with the second part of that question. It's a great question. And we believe that really a lot of the skills and the expertise that will enable us to be successful as a solution provider comes from the acquired company. And so preserving and bringing those -- successfully integrating those new employees who understand the markets that they serve and their customer needs are really critical. And that's the key to success in specialty businesses is the market understanding, customer -- and understanding how to fulfill customer needs. So you make the key point as being mindful of acquiring assets or bringing assets in and successfully retaining that skill set to solve problems and being a solution provider is critical. That's something that we have to acquire with. We won't be able to grow that successfully in these new applications or new chemistries. If you think about going to the first part of the question, how much runway do we have to continue to improve in our comm ex initiatives, I think there's quite a bit. And but again, I would put it more in terms of our shifting our portfolio to the more sustainable solutions type mix. So as you can see, we're really focused on introducing to the customer base, recycled-containing materials containing circular polystyrene could contain bio-based material. And we're seeing high demand for that. As we secure -- I would say there's -- as they qualify those materials, I believe the rate-limiting factor will really be our ability to secure feed, the appropriate feedstocks for those materials. But I would think there's a long runway for improvement as we continue to introduce and broaden that offering to our customer base.

[Laurence Alexander:]

And then just lastly, the bio-based materials and the recycled materials, are either of those or both of them delivering higher margins in terms of cents per pound, I mean, rather than percentage margins just in transactional cash margins?

[Frank Bozich:]

So the simple answer is yes. Both in percentage margin terms and in absolute dollar terms per unit, they're improving.

[Operator:]

Your next question comes from the line of Eric Petrie with Citi.

[Eric Petrie:]

If I were to annualize second half '20 EBITDA, excluding the inventory reval, you get to $440 million and that compares to your range of $400 million to $450 million. So can you talk about the $10 million upside, where that comes from and then $40 million downside?

[Frank Bozich:]

Yes. I think when we look at the second half, I'm not sure -- there's a pretty difficult exercise to go through when you look at the second half to strip out how much pent-up demand from Q2 slipped into the Q3 and Q4. So I'd rather look at our financial forecast from our customer base and the forward outlook we're getting from our customers, and really build that based on a bottoms-up basis with how the product lines. So -- and that's how we got to the range that we've got is really that detailed forward forecasts that we're getting from our customer base. Because, again, as you point out, second half 2020 had a lot of moving parts that it's hard to estimate how much inventory rebuild and how much pent-up demand there was. And so again, we did more of a bottoms-up build.

[Eric Petrie:]

Okay. Secondly, rubber volumes in the quarter, I think, were stronger than expected. How do you see demand this year for ESBR and SSBR grades? And did you see any inventory restocking?

[Frank Bozich:]

So what we're seeing right now is strong. We're seeing strong demand but little ability from the retailers or the tire producers to build inventory. In fact, inventory levels are staying relatively strong -- or staying relatively stable. And the other thing I would point out with our volumes in Synthetic Rubber is, we've been successful in 2020 to win new business with new customers, in particular, in Asia and with some new grades. And so that stronger demand -- we're seeing a demand recovery, but also we're seeing a mix change from a historical business where we're seeing more growth and more volume coming from new customers in Asia.

[Operator:]

Your next question comes from the line of Angel Castillo with Morgan Stanley.

[Angel Castillo:]

I was hoping you could walk us through how you're thinking about working capital in 2021 and the magnitude of potential use of cash as sales recover?

[David Stasse:]

Yes. Angel, it's Dave. We gave in our slide deck some kind of the pieces, I guess, you can work your way towards a free cash flow estimate for '20. And if you take the midpoint of our guidance range of $425 million EBITDA and walk through those pieces, you'll get to a free cash flow number of $240 million, and that's at working capital neutral. I think the biggest driver of our working capital is obviously feedstock prices. Now we don't currently foresee a lot of volatility in feedstock prices through the year. I mean, we -- as far as we can see. So we've not forecasted anything for the year in either direction related to feedstock prices. What I would say operationally is we took our inventories down considerably. In 2020, we dropped our inventory volumes about 20% as a company. And we're going to keep it there. So we're not going to be building inventory as a company. I think we do have opportunity in other working capital areas. We have implemented some initiatives within the company to further reduce our working capital numbers. So what -- I guess, the net of the answer to your question is, on a flat feedstock price level, I would estimate that we'll reduce working capital in the year. I would put a number of $40 million to $50 million probably on it, just through our own operational initiatives.

[Angel Castillo:]

Understood. That's very helpful. And then separately, Frank, I was hoping you could talk a little bit more about your sustainability initiatives. You're clearly having a lot of success with winning new business with your product launches, whether it's PULSE ECO or some of the recycled-based PC and bio-based TPUs that you mentioned. So maybe if you could just kind of expand on that and give us a little more color. What is the EBITDA contribution of kind of your total sustainability portfolio? How -- some margins are clearly better than kind of the fossil fuel-based products. But how has that progressed over the year as you've ramped up sales? And then at what point does your capacity footprint become kind of a good problem in the sense of needing to expand?

[Frank Bozich:]

Yes. There's a lot there. And honestly, I couldn't give you an answer for the uplift in margin across the portfolio of the sustainable products versus non. What I would tell you is because there's so many different products and so much going on, but I would just say, in general, some of the prices are multiples of virgin material in certain categories. And the others, it's double -- you should be thinking double-digit unit margin improvements. But again, this is a broad-based effort that we're making across every one of our business units. And actually, I didn't even mention this on the call. What I would also say is we've got our first order for bio-based synthetic rubber in the end of last year. So we've received mass balance certification for our Schkopau, Germany site. And we're seeing the tire companies really looking to change their environmental and sustainability footprint. And so there's a lot of interest in this. Now again, it will take -- there's a bit of a long runway in certain industries like the tire industry to qualify those materials. But the good news where we're using chemically recycled or bio-based feed that is that those end products basically have the same performance characteristics when we use that feed as virgin material. So I know I didn't give you specifically the answer you're looking for, but I would just say there's a long runway, and you should be thinking as we're successful in that relatively significant improvement in unit margins.

[Operator:]

Your next question comes from the line of Bob Koort with Goldman Sachs.

[Thomas Glinski:]

This is Tom Glinski on for Bob. So first question, it just sounds like you're expecting to be maybe a year ahead of schedule on the delevering target post the Arkema acquisition. Could you just speak to what we should expect to see on your capital allocation priorities maybe in the back half of this year and into 2022 between M&A, repurchase, re-upping the dividend?

[David Stasse:]

Yes. This is Dave Stasse. I'll answer that question. You're right. We are ahead of schedule. And the reason we're ahead of schedule, well, for two things. One is because of the cash generation and also because our EBITDA forecast has risen since we last forecasted numbers. So we do think we'll be in the neighborhood of 3x net levered by the end of 2021. With -- as we announced when we announced the PMMA acquisition, we did reduce our dividend and suspend the share repurchase program. I mean, those 2 things will be something we'll have to assess as we move forward in the context of other cash needs for the company and for the new company and those cash need could be organic growth projects for the acquired business or other acquisitions. So it's just something we'll have to look at as we go forward post-closing.

[Frank Bozich:]

Yes. I guess maybe just -- I want to build on the one point that Dave is making. We will continue -- as we said when -- in December when we made this announcement, we will continue to explore opportunities to broaden the offering that we have to CASE and Engineered Materials customers through M&A and other bringing in new product lines. Now obviously, our first priority is to integrate the PMMA business and to get our systems harmonized. But the other thing is, too, at the appropriate time, we would also -- we will be looking to separate more of the commodity products to help fund that growth. So we're balancing all of those factors when we think about the future and our capital allocation.

[Thomas Glinski:]

Got it. That's helpful. And then on CASE applications, performance was quite strong in 2020. Could you just go through the moving parts, and maybe what outperformed, what underperformed within that sub business?

[Frank Bozich:]

So well, the CASE applications, with the acquisition of the Rheinmunster plant in Germany, we have more flexibility in terms of customizing smaller lot production and more tailored solutions for our customers. But what I think you could read into that is that we saw really strong traction in introducing new products in applications, in particular, I would point out DIY. So the DIY market and adhesives and sealants did quite well that last year. We also introduced other new grades and materials based on the technology that we have now in Rheinmunster and those got good traction. But I think if I were to point to some end market that really was robust, it was DIY, and I think -- and construction applications. Those were quite strong.

[Operator:]

Your last question is a follow-up from Laurence Alexander with Jefferies.

[Laurence Alexander:]

I just wanted to revisit the discussion around the bio-based and recycled products. Are those -- by implication, are those being included or will they be excluded from any divestiture decisions to exit their commodity positions in Trinseo's portfolio?

[Frank Bozich:]

So the simple answer is no. So in every one of our product areas and our business segments, we are trying -- we believe in that increasing the ratio of sustainable products is to our advantage, and we're seeing big demand from our customers. So across every one of our product segments, we're introducing those products. And as we make -- evaluate what businesses to sell, if that were to happen in the future, those products that are intrinsic to that product line would go with it.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.